Friday, March 4, 2011

Finding a Condo Investment Unit (Part 2)

As discussed in yesterday’s post, two of the biggest factors impacting any decision to invest in a condo include one’s investment style and budget. However, these aren’t the sole considerations when it comes to your condo investment; once you’ve thought about the type of condo you’d like to invest in and how much you have to spend, you’ll have to decide where to spend your hard-earned dollars and just how much condo you’ll really want or need. Something to consider when making these decisions is your risk tolerance.

Like the old adage goes, location is a key factor in any real estate transaction. From an investment perspective, you’ll want to consider your target demographic when deciding on where to purchase your rental unit because location (and thereby lifestyle) will be an important consideration for prospective tenants.

Condo rental units tend to be preferred by young professionals without children – both singles and couples – and as such, proximity to major commute arteries and ease of public transportation is an important consideration. This is particularly true in the city where individuals often commute to work by subway, streetcar, bus or on foot. Neighbourhood schools and churches tend not to be of high importance to this younger demographic, but access to local amenities such as banks, grocery stores, restaurants and entertainment serve tremendous value.

Condo rental units can also be attractive to another subset of the population: downsizing retirees. This is especially true as we expand outwards toward more suburban areas. Again, the needs of this demographic should be considered; namely close proximity to public transportation and other neighbourhood amenities.

Consideration: Generally speaking, the experts we spoke with suggested that the decision of where to invest should ultimately involve balancing cash flow in the short-term vs. return on your investment over the long-term. Condos in the downtown core (when compared with other areas throughout the city) cost a hefty premium per square foot; however, these units generally command higher rents, have lower vacancy rates and spend less time on the market for resale. On the other hand, condos located in more suburban areas tend to be more affordable but also to have higher vacancy rates. While these properties can spend relatively more time on the market for resale, they can still allow for a decent return. With our growing population and traffic frustration stemming from urban sprawl, the traditional “hotspots” are certainly evolving.

As suggested by some of the real estate veterans we spoke with, diversifying your property portfolio with investments in different areas will help to reduce risk. You’ll need to balance out your personal investment style, budget and risk tolerance in deciding where to invest.

Size

Because prospective tenants or buyers in a condo unit will likely be young professionals or retirees, a smaller unit is ideal. Whether you’re considering a Bachelor/Studio suite, a 1-BR or something a larger will depend heavily on your budget. However, location, resale value and ease of resale should also be considered when making such a decision.

Smaller studio or 1-BR suites may be acceptable and in higher demand in the downtown core, while the expectation for more space tends to increase on the city’s outskirts and in the suburbs. At the same time, larger units are becoming increasingly rare, especially in the downtown core. While such units may be a little more difficult to rent than a more modest, smaller space, they can hold much higher value on resale due to scarcity. Small 2-BR suites have become increasingly popular amongst young couples looking to rent and buy.

Consideration: Think about how quickly you’d be able to release your investment unit once you’re ready to cash out. For example, while a studio suite might be highly rentable in the downtown core, they tend not to be as popular on resale, simply because the market for this type of unit is generally more limited to investors. Compare this with a 1-BR suite in the same neighbourhood. Prospective buyers would likely include not only investors but also end-users.

Finding the right balance between size, long-term resale value and ease of resale will help to optimize returns on your investment condo. Again, your investment style, budget and risk tolerance will help you determine where and how much condo to buy.

Tune in again next week as we continue with the final installment on this three-part series. We’ll take be taking a look at some other factors to consider when making an educated investment decision, and how to take the next step in your quest to find a profitable condo investment.